The plant and insect communities of many summer pastures in the Swiss Alps are changing as they become encroached by woody plants. To understand the implications for overall biodiversity, we need to determine how different taxonomic groups respond to shrub encroachment. We investigated effects of encroachment upon species diversity of vascular plants, butterflies, and grasshoppers on two subalpine pastures (Mesocco and Guarda). On each site, we recognized a sequence of vegetation types representing a gradient of increasing shrub cover. The number of rare plant species was strongly affected by the degree of encroachment, with areas dominated by either dwarf shrubs or Alnus viridis having fewer species than areas of open grassland. In the Mesocco site, we also found differences in other measures of plant species richness (total species richness, number of herbaceous species) and in the number of grasshopper species. While plant richness was highest in grassland-dominated vegetation types, the species richness of grasshoppers was highest in types with a low to intermediate cover of dwarf shrubs. We found no effect of shrub cover upon butterfly species richness at either site. Biotic factors (shrub cover, grazing intensity, and also vegetation-related variables for the insect groups) explained a larger proportion of the variance in species composition of both plants and insects than did large-scale abiotic factors (altitude, aspect, and slope). Our results demonstrate that shrub encroachment is a threat to the biodiversity of subalpine grassland ecosystems. We recommend conservation actions that prevent extensive shrub encroachment but promote a mosaic of small areas at different successional stages.